Molex Is Making the Right Connections

By

Johanna Bennett

Updated April 20, 2011 12:01 a.m. ET

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Molex isn't a household name. Yet chances are you have its products in your home right now.

With more than $3 billion in yearly revenue,
Molex
(ticker: MOLX) is one of the world's largest makers of electronic connectors, controlling close to 8% of a $40 billion global market. These connectors are found in electronic devices such as smartphones, computer equipment, high-definition televisions, cars and X-ray machines in hospitals.

Like other electronics companies, Molex has faced challenges following last month's earthquake in Japan.

At a Glance

Molex (MOLX)

Stock Price:

$25.27

52-Week High:

$28.51

52-Week Low:

$17.50

Market Cap:

$4.4 billion

Est. FY 2012 EPS:*

$2.05 per share

Fwd P/E:

12.6 times

Est. Long-Term EPS Growth:**

10%

Est. (FY'12/FY'11) EPS Growth:

12%

Revenue (trailing 12 months):

$3.4 billion

Dividend Yield:

2.90%

CEO:

Martin P. Slark

Headquarters:

Lisle, Ill.

* Molex's 2012 fiscal year ends June 2012. ** Based on analyst estimates looking ahead three to five years. Sources: Thomson Reuters, Yahoo! Finance

The company gets 18% of its annual revenue from Japanese electronics manufacturers. Investors worry whether sales could be hurt because of a downturn in electronics consumption from within Japan as well as a falloff in Japanese export capacity.

But after dropping 12% since February when it hit a two-year high of $28.22 a share, Molex shares now offer investors a compelling opportunity.

Add a 2.9% dividend yield, and the stock deserves better than the roughly 12 times forward earnings it now fetches.

"There is no getting around that Japan will be a challenge for the company, perhaps for two or three quarters, but it is not a reason to believe that this company's long-term prospects have been damaged," says Steve O'Brien, an analyst with J.P. Morgan Securities.

Or as Mike Brell, an analyst at Frost Investment Advisors puts it, "this is a much higher quality company than the market is giving them credit for right now."

Molex declined to comment for this story. On May 3, the company reports financial results for the quarter that ended in March.

It's also a lucrative business. Wall Street sees profits climbing an average of 10% annually over the next three to five years.

It hasn't always been easy. Molex's earnings withered during the recession as sales and profit margins crashed.

Now, industry sales are growing roughly 7% annually amid an economic rebound, the proliferation of smartphones and the arrival of tablets and other next-generation electronic devices.

Molex has shifted big portions of its manufacturing to China. Heavy spending in research and development is paying off, with roughly 40% of its revenue stemming from products developed in the last three years.

And operating profit margins are rising thanks to a three-year restructuring initiative completed last year.

"It is a turnaround story," says Sherri Scribner, an analyst with Deutsche Bank. "They have been working on improving margins and the business model for a long time, and they are finally getting traction from it."

And of course, Molex generates lots of cash that it has put to use hoisting the quarterly dividend payment.

For all this, investors don't pay much.

At 12.6 times projected earnings over the next four quarters, Molex's shares trade near a five-year low and well below their five-year average of 18.

J.P. Morgan's O'Brien sees the stock climbing to $32 a share over the next 12 months, a 27% premium to today's close.

At that price, the stock trades at 16 times the $2.05 a share the Street sees the company earning during the next fiscal year, scheduled to end in June 2012.

Of course, Japan remains a sizable challenge for Molex over the next few quarters. Its biggest end market – telecommunications – is notoriously cyclical. And raw material prices are rising, which could play havoc with margins.

And through a complex, three-tier stock structure, the Krehbiel family – their ancestor Frederick Krehbiel founded Molex in 1938 – controls 30% of the company's voting shares and has considerable veto rights over matters such as takeover bids.

Still, Molex's future prospects look good. And with a growing dividend and a cheap multiple, the stock could power up portfolios.

Full Disclosure

• J.P. Morgan and/or one of its affiliates has provided investment-banking services to Molex in the last 12 months, according to a disclosure statement published on April 14, 2011. The firm and/or one of its affiliates plans to seek compensation in the next three months for investment-banking services. J.P. Morgan has an Overweight rating on the stock.

• Deutsche Bank and/or one of its affiliates has provided investment-banking services to Molex in the last 12 months, according to a disclosure statement published on April 15, 2011. The firm and/or one of its affiliates plans to seek compensation in the next three months for investment-banking services provided to Molex. Deutsche Bank has a Buy rating on the stock.

• Frost Investment Advisors held 257,632 shares of Molex as of March 31, 2011, according to StreetSight.net.

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